transformation of china's telecommunications sector: a macro perspective

*Corresponding author. Tel.: #358-14-602793; fax: #358-14-603956.E-mail addresses: [email protected]." (P. Gao), [email protected]." (K. Lyytinen).

Telecommunications Policy 24 (2000) 719}730

Transformation of China's telecommunications sector: a macroperspective

Ping Gao*, Kalle Lyytinen

Faculty of Information Technology, University of Jyva( skyla( , SF-40351, Jyva( skyla( , Finland

Abstract

This paper examines the telecommunications reform in China from a macro perspective. It describes theprogress of Chinese telecommunications reform, and investigates macro level changes that have a!ectedthe transformation process. Two key issues are addressed: reform in the regulatory regime, and changes in themarket structure. ( 2000 Elsevier Science Ltd. All rights reserved.

Keywords: China; Market; Regulatory regime; Telecommunications reform

1. Introduction

In recent decades, most countries have initiated telecommunications reforms, with these reformprograms manifesting divergences in approaches. An important reason for this lies in di!erentmotivations shaped by the individual environments of countries. For example, in the United States,the uno$cial status of the AT&T monopoly made it a target for antitrust laws. In consequence,market change has been consistent, and the US has become a leading country in telecommunica-tions reform. Moreover, because of the dominant capacity of domestic incumbents, internationalcompetition has also been encouraged to a certain degree (Baliga & Santalainen, 1999). In the UK,market liberalization was initiated by the government's move to improve the performance ofstate-owned enterprises. In contrast, most countries in the EU, while being weary about largeforeign operators entering their markets before domestic operators were ready, and before being`satis"eda with their universal service, have preferred cautious reforms (Collins & Murroni, 1997;Finland Ministry, 1996). Expecting to promote their economies by the fast development of

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telecommunications, some developing countries have adopted radical, excessive changes in tele-communications through attracting foreign capital (Petrazzini, 1995).

In an international context, China presents an interesting case study. China's unique macroeconomic and political system has undergone a series of reforms which have thoroughly a!ectedchanges in the telecommunications sector, and have made it necessary for China to adopt a specialstrategy in telecommunications reform. Being the fastest-growing and largest prospective market,Chinese telecommunications sector has been the focus of the telecommunications world. Buta systematic analysis of Chinese telecommunications reform is still missing. Some scholars havefocused on speci"c parts of the fundamental change, such as the Internet (Tan, 1999). Mueller andTan's work (1997) presents a scholarly examination of China's economic reform in the telecommu-nications sector. But some changes, such as the 1998 reform, are not included in the analysis. Thispaper aims to "ll in this gap. Speci"cally, this paper tries to elucidate Chinese telecommunicationsreforms from a macro perspective. It will lead to conclusions on how telecommunications reformhas been successfully carried out in China, and why progress has been achieved in such a speci"cmanner, and propose an understanding of how China has promoted telecommunications reformby practically handling macro restrictions. To do this, we will "rst examine the macro backgroundof Chinese telecommunications reform. We will then investigate the regulatory reform of China'stelecommunications sector in the context of macro reform. We will also analyze the marketstructure changes that were hindered by the tardy reform at regulatory regime and macro level.Finally, we highlight Chinese features in the telecommunications reform, and analyze the futureprospects based on a discussion of macro environment dynamics.

2. Background

Being an element in the national economy and political system, telecommunications reformcannot be carried out independently of a macro reform program. For a long period China strictlyadhered to a socialist regime that excluded competition. With limited public-owned economicelements as a supplement, the national economy was controlled by state-owned enterprises. Privateand foreign capital was restricted. The socialist regime did not admit the role of economic law.Instead, resources were allocated and the market was regulated with administrative measures,which were formed through coordination using a centralized, fragmented administrative system.This system had the following characteristics: di!erent state-owned industries were under thecentral control of and belonged to speci"c governmental institutions. Such an institution hadusually a title of a ministry or a national company. These institutions had two functions: takingcharge of speci"c industries as governmental branches and carrying out the headquarters of theira$liated companies. In addition to these institutions some comprehensive administrations werealso established.

In 1978 China entered an era called the `system reform and market openinga. The traditionalsocialist regime began to undergo a series of reforms towards `socialism market economya. HenceChinese reform has been to adopt market economy while maintaining socialism. On the one hand,aiming at transferring management functions from governmental bodies to industrial organiza-tions the macro administrative system has undergone two rounds of reform. The "rst round ofreform was initialized by the central government in 1994. But the original aim of separating

720 P. Gao, K. Lyytinen / Telecommunications Policy 24 (2000) 719}730

1 There are di!erent de"nitions on `centralizeda in telecommunications. Melody (1999) de"nes it as the functionalcombination of making policy and executing regulation to one administration. Director (1992) refers it to the jurisdic-tional unity of local and central regulation. Here it means the involvement of central government on routine regulation.

enterprise management functions from government branches was not achieved and only somesuper"cial changes took place. This objective was attained through a new round of governmentalreform that started in 1998, which brought out deep changes in the structure and functions of thegovernmental system. On the other hand, market structure has been changed and the competitionhas been introduced gradually. While most industries and enterprises entered a full-competitionmarket some years ago, the large-scale, state-owned enterprises (LSEs) and the infrastructuresector have been lagging behind. Ideologically, public ownership has been considered to be anessential characteristic of socialism, and the maintenance of LSEs' dominant position in thenational economy has been viewed as the guarantee of adhering to it. Hence, the LSEs became thelast sector to be introduced to competition, especially that of private and foreign capital. The case isthe same for the infrastructure sector because of its important position in national economy. As ofnow, the reform involving LSEs and the infrastructure sector is still advancing. The currentprogress is such that, while the state maintains its control over LSEs and the infrastructure sector,limited competition has begun to be allowed there.

To avoid political risk, China has employed a reform model one could call `act after trialsa. Thismeans that instead of initializing an overall reform by issuing new laws and completely adjustingthe administrative regime, a feasible new system is found through some trials with only limited,necessary modi"cations on the administrative regime being made. Once the new system has beenformally formed, an overall reform is subsequently carried out by enacting state directives andcompletely reforming administrative regime. Under this principle, while market change has movedforward step by step, administrative reform has advanced laggardly and legislative processes havebeen carried out slowly compared with practical need. As an example concerning the legislativeprocess, although in China private enterprise was allowed in the early 1980s, only in 1999 was anitem protecting private ownership of enterprises added to the Constitution (People's Daily, 1999,15 March). Some necessary laws like the `Competition Lawa, the `Antitrust Lawa are still missing.

3. Telecommunications regulatory regime reform

3.1. Institutional reform: from fragmented and centralized 1 to coherent and decentralized

For a long time the Chinese public telecommunications sector was a monopoly. Like most othercountries, e.g. most European countries and Japan (Pontarollo, Gemelli & Galeazzi, 1998), it hada PTT that monopolized the postal services and public telecommunications. The PTT combinedfunctions of a public operator and a regulator. In China such an institution was Ministry of Postsand Telecommunications (MPT). Directorate General of Telecommunications (DGT), a depart-ment of MPT, was responsible for the operations of public telecommunications. MPT hadprovincial Posts and Telecommunications Administrations (PTAs) as its agencies. Under PTAswere the municipal Posts and Telephone Bureaus (PTBs).

P. Gao, K. Lyytinen / Telecommunications Policy 24 (2000) 719}730 721

For most countries during the monopoly period, the PTT has been the sole regulator and publicoperator (Finland Ministry, 1996). But in China, in#uenced by the planned economy employinga centralized, fragmented administrative system, the situation was somewhat di!erent. Horizon-tally, the regulation was carried out by several bodies, and the MPT did not have an exclusivepower in regulating the whole telecommunications "eld. The State Council (SC) was involved intelecommunications regulations at the highest level, and it intervened to coordinate di!erentauthorities when necessary. The State Planning Commission (SPC) was involved in tari! regula-tions. It directed and approved the MPT's tari! policy. Through ministries that directly monitoreddi!erent industries, the State Economic and Trade Commission (SETC) was responsible for theadministration of LSE, like DGT. The State Radio Regulatory Committee (SRRC) was in charge ofradio administration. Ministry of Broadcast, Film and TV (MBFT) had a monopoly over CATVoperations. Ministry of Electronic Industry (MEI) had the authority over electronic manufactur-ing. In#uenced by the sectoral system of planned economy China had also several separate`dedicateda telecommunications systems. These state-owned systems were controlled by di!erentgovernmental branches for their interior uses, like Ministry of Railways ("xed network), Ministryof Power ("xed networks), China Academy of Science and State Education Commission (CAS andSEC, data networks), etc. Additionally, each dedicated network owner had jurisdiction over its owndomain.

In a situation like this the basic concern in realizing e$cient regulation is to harmonize policiestowards central government's goals. In practice, this was realized through SCs getting involved inregulatory routine. The fragmented regime worked satisfactorily during the monopoly period. Thepublic telecommunications were mainly handled by the MPT that had its own centralizedadministrative system. This enabled the MPT to harmonize policies within its domain. Butas new services appeared and their markets opened from the late 1980s, this fragmentedregime became ine$cient. There were contradictions between technological convergenceand the fragmented regulatory regime. Frequent coordination by the SC was needed. But theSC's e!orts were often ine$cient and did not reach desired goals. China did not have a complete setof necessary laws or decrees to support regulation. Instead, the coordination was carried outthrough administrative measures and by negotiation. In many cases a negotiated compromisewas the only feasible outcome. But such a compromise was often reacted to inactively andboycotted by some concerned parties because the negotiated results damaged their interests.Therefore, China faced a challenge to conduct a deep regulatory reform that would establisha coherent regulatory regime.

In 1994, China's basic telecommunications market became limitedly open due to the formationof Unicom, another state-owned operator with MEI as its main `backera. Meanwhile, theregulatory regime underwent a change. It was a part of a state-wide governmental reforminitialized by the central government that aimed to separate enterprise management functions fromgovernment branches. As a result MPT had its organizational structure adjusted. Registered asChina Telecom (CT), DGT was changed from a functional department of MPT to an enterpriseresponsible for operating and managing MPT's "xed and mobile networks (MPT, 1996). At theoutset this change was just like most international regulatory reforms, which are characterized bythe formation of a coherent regulatory regime with an independent, exclusive regulator (FinlandMinistry, 1996; Pontarollo et al., 1998). But in China this was a super"cial change. CT was stilldirectly under MPT's control without independent rights in "nance, investment, personnel, etc.


Hence CT was not a real enterprise, and the MPT was not a `purea regulatory authority either.The case was the same for other industries. The whole macro reform was a super"cial make-up.Therefore MPT could not function as expected. On the one hand, MPT would not work fairly as itwas biased towards its a$liation to CT while executing regulation. On the other hand, MPT wasnot powerful enough to intervene in other ministries' domains. For example, MPT had to turn tothe SC for resolving a con#ict with Unicom and its backer MEI concerning the name given toUnicom's local branches (DTA, 1997).

Prevented by the reform progress at the macro level, the 1994 move of telecommunicationsregulatory reform failed. To meet the regulatory demand from market liberalization, a temporarysolution was developed, which was to enforce harmonization. The State Joint Conference onNational Economic Informatization was established in 1994. In 1996 it was substituted by theNational Information Infrastructure Steering Committee (NIISC), which was charged with respon-sibilities for the formulation and implementation of plans, policies, and regulations in Chineseinformation industry. The NIISC was chaired by a vice-Premier of the SC. The deputy directorswere ministers from MPT, MEI, SPC, SETC, the State Science and Technology Commission, andthe People's Bank. The members were vice ministers from 12 agencies including CAS, MBFT, SEC,etc. The NIISC had a working o$ce hosted within the MEI (Tan, 1999).

The government's original goal in forming NIISC has not been fully achieved because of NIISC'snature and administrative level. The NIISC was only a temporary `Task Forcea of the SC, like theInformation Infrastructure Task Force in the US. The NIISC had the normal authority toformulate regulations and polices for the information industry. But as an interim organization itwas not authorized to take over all regulatory responsibilities. Main regulatory powers were stillundertaken by di!erent executive authorities. The NIISC lacked legislative status, "nancial means,and administrative power to e$ciently execute regulation. It still had to negotiate and cooperatewith other powerful governmental agencies that were in charge of China's telecommunicationsindustry (Cai, 1996; Tan, 1999).

So far, the solutions had been attempts to "nd out the `trade-o!a between a necessity to conductregulatory reform in response to technological convergence and market liberalization, and therestrictions posted by super"cial reforms at the macro level. To really address emerging regulatoryneeds, a thorough reform was necessary. This was realized in 1998 when a new round ofgovernmental reforms began. Within the telecommunications sector the goal of this round ofreform was to completely separate government and enterprise functions, eliminate monopoly, andincrease competition. As an outcome of this reform the Ministry of Information Industry (MII) wasestablished. MII became a neural regulator by taking over the regulatory functions of MPT, MEI,SRRC, SPC, MBFT, NIISC, etc., while giving away the functions of enterprise management. MIIwas mandated with an exclusive power to administrate and regulate the whole informationindustry. The State Posts Administration was established as an a$liation of MII that wasresponsible for the postal sector. MII was organized into departments responsible for policymak-ing, administration, market regulation, and internal a!airs. Two important posts of MII are theTelecommunications Administration Bureau and the Radio Regulatory Bureau, which togetherregulate telecommunications (People's P&T, 1998, 11 July, 1999, 10 March). Hence, at the highestlevel MII forms a coherent regulatory regime. Unlike its predecessor MPT, MII is not tightlycontrolled by SC in that the SC will not directly involve itself in regulating telecommunications. Atthe local level, the fate of PTAs is still unclear. This change will involve some governmental bodies


that are beyond the jurisdiction of MII. It is a part of local governmental reform that still needs tobe done.

3.2. Regulatory pattern change

Theoretically, the regulatory process within telecommunications should be universally similar,i.e. it should form a loop composed of market players, legislators and laws, policymakersand decrees, regulators and directives, and courts, like the US (Director, 1992). Yet, in#uencedby the long history of the planned economy, for Chinese telecommunications regulation no suchcomplete framework was available. Like the macro case that the legislative process has notbeen in pace with the practical needs, in telecommunication it was not until 1989 that the"rst local Telecommunications Decree was issued in Liaoning as a basis to regulate its localmarket. Then other provinces followed (MPT, 1992, 1995). Still a state decree and `Telecommuni-cations Lawa are missing. Instead, the regulation has been executed by referring to governmentaldirectives and applying administrative measures. Only recently the Telecommunications Law hasbeen put on the agenda of the National People's Congress, the state legislature (People's P&T,1999, 2 April).

Appropriate modi"cations of the regulatory pattern are necessary as market structure changes.According to the European Commission (1999) an operator having higher than 25% market sharehas a dominant position. For an unbalanced market, i.e. a market with dominant operators, it isdi$cult to achieve fair competition, and therefore the market needs to be adjusted and regulated.The regulated targets should be those market dominators that control monopolistic bottlenecks,like the monopolies of the local loop and the physical network (Knieps, 1997). We can "nd a lot ofsuccessful international experiences of asymmetric regulation, e.g. the UK (Finland Ministry, 1996).In 1994 basic telecommunications changed from a monopoly to a duopoly in China, while CT stillheld a dominant position in the market. At the same time MPT was clearly empowered to fairlyregulate the market. But this intention of the central government could not be achieved without thesupport of necessary, practical changes in regulatory institution. Therefore, an asymmetric regula-tion with a `twisteda direction was adopted by MPT. The dominant CT, instead of the inferiorUnicom, was in a favorable market position. A basic market order, which enabled the Unicom tosurvive, was kept by the routine regulatory intervention of central government through NIISC.After 1998 when MII substituted for MPT, the asymmetric regulation was formally modi"ed. Thecentral government set principles of supporting the Unicom and protecting fair competition. Asa neutral regulator MII began to execute the regulatory function by implementing a properasymmetric regulation. For example, the recent tari! adjustment scheme allowed Unicom to havemore #exibility in pricing (People's P&T, 1999, 2 March).

4. Telecommunications market change

4.1. Before 1998: from monopoly to limited liberalization

The "rst area that was opened to domestic and foreign competition within Chinese telecommu-nications was equipment. This happened in 1982. In view of the fact that Chinese manufacturing


industry was very backward, at that time China adopted a policy of `using markets to exchangetechnologiesa to guarantee telecommunications network development with advanced technologies(MII, 1999). In fact, China opened equipment market earlier and more intensively than most othercountries. For example, it was in the late 1980s when most EU members opened terminalequipment sales to the countries that had agreements of equal market access with them (EuropeanCommission, 1988).

For a long period Chinese public telecommunications have been monopolized by the MPT.This market was opened in the late 1980s due to some strong incentives. Firstly, thenational policy concerning the telecommunications sector was changed. During the monopolyperiod Chinese telecommunications development was supported by state's `preferentialapolicies. The SC approved that MPT could charge an installation fee from every subscriberthat corresponded to the construction cost of one line. MPT was granted a privilege inadvancing depreciation, using foreign currency and paying tax. More than half of thewhole of telecommunications investment was obtained via these preferential policies (MII, 1999).These policies promoted fast development in telecommunications and brought hugepro"ts to the telecommunications monopoly. But meanwhile the prices had been high,and the service quality had not improved satisfactorily. Therefore, these preferential policieshad met with more and more resistance from society. Also, the SC recognized the ine$ciency andnon-equality of exclusively granting such a strong preference to the telecommunicationssector. From the mid-1990s the government began to gradually remove these policies.But the MPT itself was not able to meet the market demands without the support of state policy.The government had to consider introducing other sources to the telecommunications sectorand using competition to promote telecommunications development. Secondly, the fragmentedsystem of telecommunications regulation provided opportunities for some industries andinstitutions to enter the telecommunications market. Under a fragmented regulatory regime, theMPT was not capable of controlling the market entrance, though it hoped to sustain itsmonopoly. Therefore, some industries and institutions entered the lucrative telecommunicationsmarket by lobbying other authorities. The MPT was politically incapable of obstructingthese changes that have been promoted by the public and other industries. Thirdly, withinthe telecommunications sector there has been a strong desire to cooperate with other sources.Because technology innovated fast and new services appeared often, in order to obtain fastresponse to market dynamics and get support from local governments, PTAs and PTBshad been given increasing degrees of independence from MPT. Driven by the huge marketdemand they had been ambitious to get rid of MPT's restrictions and cooperate with externalsources. Consequently, competition began to be introduced in public telecommunications sector.Recognizing its incapability of monopolizing the huge market and meeting the increasingdemand, MPT had shown a willingness to ignore these changes (Chismar, Jussawalla & Snow,1996). Yet, at the same time, restricted by the reform advances at macro level and regulatoryregime, in this reform-starting period only limited changes might happen on the principle of`act after trialsa.

First, some non-basic services that did not have high network dependence, e.g. paging services,etc., were opened to domestic competition gradually from the late 1980s. In fact this was illegalaccording to decree No. 216 issued by MPT in 1989. But the MPT has ignored these. It was as lateas 1993 that the SC approved MPT's proposal by issuing the decree No. 55 to legalize opening of


2 `Non-private enterprisesa, which include state-owned enterprises and collective enterprises, are enterprises that arerun by the state institutions.

these markets to domestic non-private enterprises2 (MPT, 1992, 1995). Currently there are morethan 2900 such operators (MII, 1999).

Competition thereafter extended to basic telecommunications. In order to meet increasingmarket demand, in 1994 approved by the SC, another state-owned company China Unicom wasformed by MEI joining with some other state institutions. Unicom was allowed to build andoperate nationwide cellular networks and, in areas where the coverage or capacity of MPT's "xedline network was limited, or in other areas as approved by the MPT, "xed local and domestic tollnetworks (MPT, 1992).

In 1994 MEI got a permission from SETC to form Jitong Communications Ltd. Jitong waslicensed to build and operate the Golden Bridge Network, which formed another public datanetwork. Its shareholders are some electronic LSEs controlled by MEI. Jitong was granted toprovide services such as satellite communications service, Internet services, Intranet/Extranetimplementation, etc.

Other competitive elements have also emerged. To promote fair competition in paging service, thepaging sector of CT was split in 1998 to form Guoxin Paging Ltd., which was placed directly underMPT (People's P&T, 1999, 6 May). To make e!ective use of frequencies owned by the army, MPTand the army formed the Great Wall Communications Ltd. that was dedicated to the deployment ofCDMA technologies. The satellite communications market has been competed by some state-ownedenterprises from 1994. A$liated to MPT, ChinaSat has been the leading player in this area since itsfounding in 1985. The Sino Satellite Communications, a non-MPT consortium, was formed mainlyby some ministries in 1994. China Orient is the third player with MPT as the holding shareholder. Asan example of transforming mechanisms and broadening channels of funding, China Telecom HongKong Ltd. (CTHK) was established in 1997. This company was formed from some provincial GSMnetworks (till now six provincial GSM networks have joined it in succession). CT held 51% of share,and other rations of share were #oating on the Hong Kong stock market.

So far only limited competitive elements were introduced. CT and Unicom were the only twocomprehensive public operators. The market structure could thus be described as a duopoly. Butoriginally this duopoly was seriously unbalanced, and Unicom and CT had a great disparity instrength. This situation corresponded to the primary purpose of the government for formingUnicom. Based on the principle of `act after trialsa, the government con"ned Unicom's formationto test for deep market changes in the future (MPT, 1996). Because of Unicom's extreme weaknessby origin and hindered by the `twisteda asymmetric regulation, the unbalanced situation of marketdid not change substantially for years. For example in 1998, Unicom's income was about 1.6 billionCNY, only 1/112 of CT's (Li, 1998; MII, 1999). It was an unreasonable market situation in view offair competition and needed to be improved.

4.2. After 1998: towards full competition by market restructuring

As a whole, the 1994 macro reform was a failure. Aiming at a deep change, a new round of reformwas launched in 1998. Consequently, on the one hand, a deep change in governmental system was


3 `Computer Dailya is a neutral newspaper. The reference from this uno$cial source has been con"rmed by interview-ing o$cials from MII.

carried out. As a result, in telecommunications a coherent regulatory regime was formed. On theother hand, the economic reform was deeply extended to the LSE and infrastructure sectors,including CT and the telecommunications industry. Hence a deep change in telecommunicationsmarket was brought out. An initial framework of telecommunications reform was approved by theSC in February 1999 (People's P&T, 1999, 6 May). Afterwards, the scheme was improved by somerevisions.

The basic idea was to form a fair market by breaking up CT, and at the same time strengthenUnicom through market restructuring. According to the reform scheme, CT would keep its "xednetwork and operations. Its mobile sector, including CT's share in CTHK, would be split to forman independent body China Mobile Group (CM). As for Unicom, a restructuring would beconducted to enforce its competitive capability. This plan has now been carried out smoothly. InApril 2000, the CM and restructured CT were established (People's P&T, 2000, 21 April). Guoxin,which had been split from CT before this round, was appropriated to Unicom (People's P&T, 1999,21 May). In 1998 Guoxin had a turnover of 8.36 billion CNY, and its general assets were 13 billionCNY. At the same time Unicom's turnover was only 1.6 billion CNY with 2.3 billion assets(Computer Daily, 1999, 4 April;3 MII, 1999).

Another goal has been to enforce competition. In basic services, Jitong has joined the competi-tion with CT and Unicom by providing Internet Phone service from April 1999 (MII, 1999). InAugust 1999, China Net Communications (CNC) was formed by four state institutions to competewith CT, Unicom, Jitong on wide-band communications (People's Daily, 2000, 5 January). Therewould be also a restructuring of satellite communications market by the formation of ChinaSatellite Group (CS) to improve the competitive strength of satellite sector. Consequently, com-pared with previous reform when only limited competition was introduced, through this round themarket has been moved towards a full competition.

With the exception of CTHK, the competition has taken place between state-owned institutions.Except for some other Chinese basic industries such as power and civil aviation, this pattern hasbeen unique. This was due to the slow transformation in ideology that rejected the involvement ofprivate and foreign capital in telecommunications sector, which was taken as a national infrastruc-ture and a sovereign body. But as the preferential policy of the state ended, the public telecommuni-cations sector has faced normal challenges in fund raising. Consequently, the CTHK has beenformed as a trial within telecommunications sector to obtain funds from the stock market.

5. Conclusion and prospects

We can understand Chinese telecommunications reform progress only by reviewing the simulta-neous changes at the macro level. Being a critical component within the national economy, in itsreform the telecommunications sector has to follow the progress of macro changes, which havetaken place in a stepwise fashion complying with the principle of `act after trialsa. This has con"ned


the characteristics of Chinese telecommunications reform. In regulatory reform, a coherent regimehas been achieved through years of transition, during which only some practical and feasiblemodi"cations have been made by enforcing the coordinating functions of the central governmentto harmonize di!erent regulators' behaviors. Instead of relying on laws, which has been the generalcase in other countries, the regulation has been conducted by using administrative methods. In itsunbalanced market China has executed asymmetric regulations. Yet, it is unique in that a properlydesigned asymmetric regulation has been formally formed only after 1998 when a deep macroreform was launched. During the transitional period the asymmetric regulation was twisted, anda basic market order was kept by the e$cient involvement of central government in regulationunder the centralized regulatory system. As for market change, the slow advance of reformconcerning the LSE and infrastructure sector has in#uenced the restructuring on DGT or CT asLSEs, and the transformation of telecommunications industry. Also the market change has beena!ected by the reform progress in macro administrative system and telecommunications regulatoryregime. Unlike other countries in which the regulatory reform was carried out up-front to direct themarket changes, the regulatory reform has lagged behind in China, which restricted the progress ofmarket changes. Like in some other countries, e.g. the UK (Collins & Murroni, 1997), in Chinabasic telecommunications market advanced from a monopoly to a duopoly, and now is beingextended to a pluralistic competition. Yet, it is unique that, except the case of CTHK, thecompetition has been con"ned to state institutions. Together with that of Unicom, the case ofCTHK represents the characteristic of Chinese telecommunications reform in this ad hoc period inthat the reform was originally a test and preparation for future deep changes. After all, marketcompetition and the regulatory regime have been improved gradually. We can concludethat, through this `act after trialsa method, China has practically handled economic andpolitical restrictions from outside environment so that telecommunications reform has advancedprogressively.

The general process of telecommunications reform is towards full competition and deregulationthrough a period of transition. For example, in the United States the reform took decades to reacha full competition in 1996; the UK's transitional period lasted 10 years, from 1982 to 1991. Led bythe US and other developed countries, globally a tide of enterprise mergers crossing nationalboundaries and spanning industries like telecommunications, computing and media has begun toform (Baliga & Santalainen, 1999; Finland Ministry, 1996). In China, starting in 1994, basictelecommunications reform has lasted for seven years. As a result, a competitive telecommunica-tions market has been formed with state-controlled CM, CT, Unicom, CNC and the forthcomingCS as main market players. The market structure tends to be reasonable and the competition hasbeen intensi"ed. Meanwhile a coherent regulatory system has taken shape. A positive conclusionmay be got about Chinese telecommunications reform. But compared with the current trend of theworld, Chinese telecommunications reform has lagged behind in view of the fact that now China isstill in the transition to a full competition. In China the restriction on market entrance is still strict,and the number of competitive operators in market is still limited. China needs time to reach a fullcompetition, and join the new tide of reform.

One lesson is that the macro economy and politics are necessary considerations in examininga telecommunications reform program. Now in China the regulatory regime at state level has takenshape. The next step will be the local system reform that will be carried out as a part of the futurereform in the local government. Deregulation will be intensi"ed to release existing limitations on


4Signed in April 1999, the `China}US Agreementa was "rst o$cially published by American government in March2000. See www.uschina.org. Now the negotiation of China with some WTO members is still underway. But the`China}US Agreementa has set the fundamental key for the "nal commitment of China to enter WTO.

service scope for an operator. As for market change, the focus will be to introduce more competitiveelements. To make full use of existing state properties, the "rst consideration in all likelihood willbe to allow some `dedicateda networks, which are also state owned, to enter the public telecommu-nications market. Recently, the Central Committee of the Communist Party of China (CCCPC),the supreme decision-making entity, decided to modify its policy for state-owned enterprises. Whilethe dominant position of LSEs in the national economy is maintained, some measures like #oatingthe stock, and absorbing private and foreign capital will be encouraged to improve LSEs' e$ciency(People's Daily, 1999, 23 September). We can expect that CT, Unicom and CS will bene"t from thispolicy and follow the experience of CTHK and CM. Foreign capital has to #ow, sooner or later, tothe Chinese telecommunications market. Advances will mainly depend on the timetable andcommitment agreed by China to enter WTO. The keynote of China's "nal commitment has beenset in the `China}US Agreementa.4 In this agreement China promised to open on accessionimmediately after entering into the WTO in all telecommunications services starting with someprovinces. China will allow 49% foreign ownership in mobile voice and data services within "veyears of accession; 49% in domestic and international services within six years upon accession; and50% in VAS within two years. By inference, private enterprises may be allowed to enter thetelecommunications "eld no later than foreign capital. But in any case the state will keep its controlover the telecommunications industry. While a restructuring of satellite communications market isunderway to form the CS, internal restructuring will take place within CT, CM and Unicom. Toguarantee fair competition, this restructuring will be carried out under MII's supervision by theprinciple of eliminating the bundling of services and networks, and the cross-subsidy betweenservices. Step by step, the market will transfer to a full competition through gradual deregulation.

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